Agreement of Balances Guidance 2017-18

Agreement of Balances Guidance 2017-18

February 2018 Agreement of Balances Guidance 2017-18 Department of Health & Social Care

2 Title: Agreement of Balances Guidance 2017-18 Author: Libby Kerr /Finance/Accounts and Operations Document Purpose: Guidance Publication date: December 2017 Target audience: DH Group Bodies Contact details: Libby Kerr Agreement of Balances Team – Accounts and Operations Room 2S14, Quarry House Department of Health & Social Care Leeds LS2 7UE You may re-use the text of this document (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence.

To view this licence, visit www.nationalarchives.gov.uk/doc/open-government-licence/ © Crown copyright Published to gov.uk, in PDF format only. www.gov.uk/dh

3 Agreement of Balances Guidance 2017-18 Prepared by Department of Health & Social Care, NHS England and NHS Improvement

4 Contents Contents ___ 4
Executive summary ___ 6
Introduction to the Guide ___ 6
1 What is AoB ___ 7
2 AoB Best Practice ___ 9
Further Reading – HfMA Practical Guide ___ 10
3 Creating and Sending Statements ___ 11
Creating the Statement ___ 11
Good Practice ___ 11
When statements should be sent ___ 11
Accruals Statements ___ 12
Issuing the Statements ___ 13
4 Agreeing to the Balances Received ___ 14
Checking the Statements ___ 14
Confirming Agreed Balances ___ 14
Timing of Responses ___ 16
Agreeing to Accruals ___ 16
Summary of thresholds for issuing and agreeing to statements ___ 17
5 Completing the forms ___ 18
Overview of data collection ___ 18
Notified Balance ___ 18
Adjustments ___ 19
Capital Adjustments ___ 20
Disputes ___ 20
Accruals .

Error! Bookmark not defined. 6 Areas of potential Issues ___ 22
Gross and Net Accounting & Recharges ___ 22
I&E - Admin and Programme Split ___ 26
I&E - Admin and Programme Split – NHS Property Services ___ 26
Hosted Budgets ___ 27
Hosted Services (Agency Arrangements ___ 27
Specialised Commissioning ___ 28
Deferred Income ___ 29
PDC, Loans, Grant in Aid and Parliamentary Funding ___ 29
Transfers under Absorption Accounting ___ 29
Partially Completed Spells (PCS) – Incomplete Spells ___ 30
Maternity Pathway Prepayment/ Partially Completed Spells ___ 30
Non Contracted Activity (NCA’s ___ 31
Treatment of NCA’s ___ 31
Unvalidated/Estimated Activity ___ 31
Contract Penalties ___ 32
Pooled Budgets ___ 32
Better Care Fund ___ 32
Sustainability and Transformation Fund (STF ___ 32
Negative Balances ___ 33
Additional guidance for Credit Notes ___ 34
Additional guidance for Unallocated Payments ___ 34
Provision for Bad Debts ___ 34
Other provisions ___ 34
Charitable Funds ___ 34
Non-invoiced Income ___ 35
Recording Transactions in the Correct Year .

5 7. Agreement of Balances 2017-18 – Recording Sub-Entity Transactions ___ 36
Balances with NHS England ___ 36
Balances with Other Bodies ___ 38
Balances with NHS Business Services Authority ___ 39
VAT ___ 40
Nursing and Midwifery Council ___ 40
The Health and Care Professions Council ___ 40
Wiltshire Health and Care ___ 40
NHS Resolution (formerly NHS Litigation Authority ___ 40
Part year NHS Foundation Trusts ___ 41
Reorganisation of providers involving transfer of services ___ 42
Subsidiaries ___ 42
8 Variance Reports and Resubmissions ___ 43
9 Resolution of Disagreements ___ 45
Annex 1 – Examples of Statements ___ 46
Annex 2 – Whole of Government Account – Agreeing and recording balances ___ 47
Annex 3 – Agreement Examples ___ 50
Annex 4 - Role of the Department of Health & Social Care and other bodies ___ 54
Annex 5 – NHSE coding for Hosted Services ___ 56
NHS England Appendices ___ 57
Appendix 1 ___ 57
Appendix 2 – due to its length, document now separately published at https://www.gov.uk/government/publications/the-department-of-health-and-soc ialcare-agreement-of-balances ___ 58
Appendix 3 ___ 59
Appendix 4 .

6 Executive summary Introduction to the Guide This guide is designed to provide practical guidance for the completion of the Department of Health & Social Care (DH) Accounting Group Agreement of Balances exercises. While the Department of Health & Social Care Group Accounting Manual (‘the Manual’) outlines the principles of the exercise including the associated accounting principles, this guidance includes more details of how the exercise should be completed in practice. The guidance should therefore be read in conjunction with the guidance within the Manual. The following definitions will apply to Agreement of Balances (AoB), and will be used throughout the guidance:  Receivable organisation - this is the organisation sending the invoice/is carrying the trade receivable/is receiving the income (i.e.

the supplier or provider) unless using net accounting (see section 6 and/ or Appendix 4)  Payable organisation – this is the organisation receiving the invoice/carrying the trade payable/recording expenditure (i.e. the purchaser or commissioner unless using net accounting (see section 6 and/ or Appendix 4) The definitions apply when referring to both Payables/Receivables and Income/Expenditure agreements.

For the purpose of this guidance document, the “national bodies” means the Department of Health & Social Care, NHS Improvement and NHS England see section 7 of this guidance for the processes to follow in agreeing balances with NHS England and its entities.

7 1 What is AoB? 1.1. The Department of Health & Social Care (DH) is required to consolidate the accounts of all organisations falling within the accounting boundary, as expanded by the Constitutional Reform and Governance Act 2010 (HM Treasury’s alignment legislation). Under International Financial Reporting Standard 10 (IFRS10) paragraph B86 consolidated statements should “...eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group”.

1.2. The AoB process seeks to identify all income and expenditure, transactions and payable and receivable balances that arise from the contracts for the provision of goods and services between group bodies (i.e. intragroup), to allow for accurate elimination of these transactions and balances within the Consolidated Departmental Account and for the preparation of the Department’s Whole of Government Consolidation Return to HM Treasury. NHS Improvement and NHS England also eliminate transactions and balances between their group bodies in preparing their sector specific consolidated accounts.

1.3. Additionally, it forms an essential part of an organisation’s financial management ensuring that an organisation’s payable and receivable balances are correct. 1.4. Agreement of Balances has historically been completed three times a year at Q2, Q3 and Q4. In 2017/18, for the first time, the Q2 agreement exercise is voluntary (although the issue of statements remains a requirement). The Q2 exercise continues to be for receivables and payables only and does not include agreement with local authorities and other government departments. Agreeing balances at Q2 is not mandatory - however as best practice we would encourage organisations to participate in discussions where there is a need to do so locally to resolve significant issues.

Submission of agreement of balances data is not required at Q2. At Q3 and Q4 submission of all agreement of balances data and balances and transactions with local authorities and other government departments is required. Group bodies are required to agree balances and transactions with bodies within the WGA boundary where the balance or transaction exceeds the WGA agreement limit. Local authorities, NHS Trusts and Foundation Trusts and Public Corporations are exempt from WGA agreements. Further information on agreeing balances with WGA bodies is available from gov.uk 1.5. The exercise completed at Q3 contributes to the Department of Health & Social Care Consolidated Interim Accounts.

The exercise looks to agree both outstanding payables and receivables and income and expenditure for the year to date, As well as providing figures for the interim accounts, any issues arising since Q2 can be addressed, for resolution before year-end. It also provides an indication of any issues which DH and consolidating entities may need to resolve in preparation for year-end.

8 1.6. The exercise completed at Q4 contributes directly to the year-end production of the provider sector, NHS England and Department of Health & Social Care Consolidated Final Accounts. This exercise includes an Income and Expenditure agreement exercise (incorporating a £2m de minimis threshold for sending out statements and undertaking agreements). Accruals statements should be sent and discussions should take place and wherever possible agreed, although formal agreement of accruals is not required.

9 2 AoB Best Practice From discussions with the NHS, the following examples of best practice have been identified: 2.1.

As a receivable body, provide as much information as possible – by issuing the statements with adequate information, as set out in section 3, the payable body will be better able to identify amounts that may be outstanding, and this will assist in the resolution of problems that may arise when agreeing balances. 2.2. Send the statements to the correct contact – issuing the statements to the contact listed will ensure that the correct person in the agreeing body receives the statement. Organisations should also quote their organisation code in the subject line of the email. Please note the process for sending statements to NHS England as per section 7 of this guidance.

Statements must be issued on time and in accordance with the timetable available on the Gov.uk website. 2.3. Wherever possible conduct correspondence electronically – issuing and responding to statements by email allows more time for agreement. Statements should also be issued in excel format. 2.4. As a payable body, respond to the statement as soon as possible – statements should be returned as soon as possible to the receivable organisation (quoting your NHS organisation code in the subject line of the email), especially where balances are not fully agreed. This will allow more time for resolution of problems.

In addition, where the payables organisation is including a balance which the receivables organisation may not be expecting (e.g. accruals during Q2/Q3, converting a negative payable to a receivable etc.), it is good practice to inform the receivable body as this will enable them to either match your treatment or explain any remaining variance. 2.5. Complete the exercise within the agreed deadlines – deadlines are agreed in advance of each exercise by DH and its National Bodies to give participants adequate time to complete their parts.

2.6. Do not chase for statements or response until the deadline has passed – To allow organisations time to complete their exercise within the deadlines it is requested that they are not “chased” for responses before the deadline has passed.

Priority must be given to those balances within the remit of the exercise. 2.7. Complete the data collection forms correctly – to enable DH and its National Bodies to see the overall balance for elimination, and to be able to correctly determine where variances exist, it is important that balances are recorded in the correct part of the collection templates. This is especially important at Q4 when the AoB forms must agree to the accounts information submitted at the same time. Further details can be found in section 5.

10 Balances should not be adjusted erroneously; especially when being asked to resubmit balances when material variances occur. In no circumstances should balances be adjusted simply to bring a variance under the tolerance set – see sections 8 & 9. Such manipulations actually serve to increase the total mismatch across the sector and increase the likelihood of there being additional AoB processes and resubmissions. 2.8. Provide reasons for adjustments where requested – where collection forms provide freetext cells to record why any material adjustment balance has been included, please provide those explanations.

It will save time at year-end if this could be completed upon the first submission of balances. The freetext explanations can enable the Department to make central adjustments and or justify the impact of the mismatch to Department’s auditors, reducing the need for further resubmissions.

Further Reading – HfMA Practical Guide 2.9. In 2014, HfMA published a very helpful and detailed practical guide to agreement of balances in the NHS. Organisations may wish to refer to this as an additional guide for establishing best practice. The guide is available from the HfMA website (http://www.hfma.org.uk/). 2.10. However, for clarity and in case of query, the guidance in this document (issued by DH and its national bodies) takes precedence.

11 3 Creating and Sending Statements Creating the Statement 3.1. The issued statement should contain sufficient information to allow the payables organisation to identify invoices that have been issued (I&E) or are outstanding (Rec & Pay) by the receivable organisation up to and including the final invoicing date.

The minimum requirement for a statement is:  The date the invoice was issued  The invoice number  The total amount of the invoice  The amount of the invoice which is unpaid (Rec & Pay)  The name of the receivables body the agreement is with.  The name of the payable body the agreement is with  I&E Only – whether the balance is considered Admin or Prog (see section 6)  A contact phone number for queries and disputes 3.2. Additionally, it is helpful if the statements include purchase order numbers relating to the invoices, a description as to what the charge is for, the name of the contact within the agreeing organisation who had commissioned the service being provided and whether the invoice is being treated as a recharge.

A description is particularly important when a purchase order number isn’t included or when the charge is included on the accruals statement at Q4. 3.3. Where a statement includes an invoice that relates to a future period, this should be identified on the statement. If neither party is accruing for this in the period (for example a month 10 invoice issued in advance during month 9), this should be identified on the statement so that both parties can adjust the item out in the ‘adjustment’ column in order to achieve consistency with the ledger balance.

Good Practice 3.4. As most payables organisations keep a log of the balances they have been sent to agree in preparation for balance collection, statements should be issued in excel format by email, quoting your NHS organisation code in the subject line of the email. 3.5. Scanned images should be avoided in all cases as they are difficult to manipulate and transfer into excel. The issue of statements in PDF format should be avoided where possible as it is time consuming to extract the information in the PDF file to use within spreadsheets. When statements should be sent 3.6. As there is a requirement to record all balances with a counterparty, regardless of whether the balance is below the de minimis levels for

12 agreement (see section 5), statements should be issued in the following circumstances:  Income statements should be issued in all circumstances at Q3 where the year to date total gross balance is greater than £10k. Balances below this level may be issued if the receivable organisation chooses to do so. At Q4 the de minimis level is £2m.  Receivables statements should be issued in all circumstances where the outstanding balance is £2.5k or above. Balances below this level may be issued if the receivable organisation chooses to do so.  Nil balances should not be issued in any circumstances – if the payables organisation thinks they should have a balance with the receivable organisation, it is up to them to discuss the issue with the receivables organisation after the deadline for statement issue has passed.

3.7. Statements containing balances for multiple payables entities should not be issued in any circumstances. A separate statement should be completed for each payables body. Refer to NHS England Guidance at section 7. 3.8. One statement should be sent per organisation, to ensure the correct balance is recorded on collection. Therefore, where the receivable organisation has multiple customer accounts for a single entity, or they are hosting services (as defined in section 6), a statement of all balances should be issued, with the exception of NHS England (see section 7 for more information).

3.9. Where an NHS Trust becomes an NHS Foundation Trust part-way through the year, it is necessary to send statements to the appropriate body. For example, if a Trust becomes an FT on 1 March, at Q4 receivable statements should be sent to the NHS Foundation Trust only, but where income statements are sent, these should be sent to the organisation with which the transaction took place (see 7.34-7.37 for further information). Accruals Statements 3.10. At the year-end, an additional accruals statement is sent, to capture the accruals that organisations will have made during their year-end processes.

It is vital that there is sufficient information on the statements to allow approval of the balances, particularly if invoices are raised late or not at all. 3.11. Accruals statements should include the same level of information as the usual statements. Accruals statements should include the following:  April dated invoices that relate to goods and services delivered in the previous financial year.

Any further payments received since the cut-off point and the end of the accounting period provided in the AoB timetable.  Accruals for goods or services provided during the year for which an invoice has not been issued.  Any other receivable or payable balances (including prepayments and deferred income) for trading balances in the current financial year that you

13 would expect to include as part of your final balance. This should include non-invoiced income including grants. 3.12. Where material balances need to be estimated, the receivable organisation should ensure that the statements include as much detail as possible on the estimation technique/ methodology to allow the agreeing body to recognise and include a matching accrual in their own accounts.

3.13. It is important that all accruals are raised, and statements issued in order that both organisations reflect the correct expenditure and income in the appropriate year to avoid timing differences and allow the transactions to be eliminated within the group account.

Issuing the Statements 3.14. Statement should be issued electronically by email. Statements relating to payables and receivables for organisations within the NHS England group will be issued by NHS Shared Business Services. Statements relating to income and expenditure are produced locally. Please see section 7 of this guidance in respect of statements for NHS England group bodies. Statements should be issued in accordance with the timetable available on DH.gov.uk. 3.15. Contact lists will be circulated by your national body and are updated prior to each agreement exercise. Organisations should, wherever possible, use generic email addresses as these are less likely to change.

It is also therefore extremely important that both payable and receivable organisations check the contact list for their sector thoroughly and update their details whenever the persons completing the agreements exercise changes. Failure to do this will result in potential mismatches being left unresolved. Contact changes should be notified to the sectors’ national body, clearly denoting this as an AoB contacts change. Any revisions to future contact lists will be highlighted in yellow, so organisations need to ensure they have the latest version prior to each exercise. (Submissions for changes should not be sent directly to DH).

3.16. A general update of the contacts list is undertaken in advance of each agreement of balances exercise. Contact lists are provided for DH and the DH Arm’s Length Bodies and are updated with the same regularity as the NHS Group contacts. 3.17. The contact lists are password protected, in order to try and reduce the number of unsolicited emails organisations have been receiving. The password will be sent to organisations at the start of the exercise by your national body.

14 4 Agreeing to the Balances Received Checking the Statements 4.1. On receipt of the statement from the receivable organisation, the payables organisation should check the list of balances against their ledger to determine whether they agree to the amounts listed.

It should be noted that this agreement forms an agreement that the balance is correct and is outstanding for payment. It is not an agreement that the balance will be paid. 4.2. If the invoice is not on the sub ledger, or full approval has not yet been given, then the payable organisation should carry out further investigation into whether the balance can be agreed in principle. This may be through further communication with invoice approvers, or by contacting the receivables organisation for further details.

4.3. In the case of Income and Expenditure balances, the payables organisation should check their expenditure reports to make sure that they have the listed transactions recorded in the current financial year. If it is recorded within the general ledger for the same year as the AoB exercise then this would be a transaction that can be agreed. 4.4. In the event that the transaction does not appear, the payables organisation will need to investigate the circumstance. It may be that the transaction needs to be accrued for, or that the transaction is shown as being for a prior or future financial year, or additional information is required regarding the transaction to be able to locate the amounts.

4.5. It is good practice for the payables organisation to prepare reports of outstanding payables balances/expenditure for the year to date in advance of receipt of the statement. This will allow the payables organisation to know in advance who they are expecting to receive a statement from, and will allow the organisation to quickly follow up any statements not received. However, requests for statements should not be made in advance of the deadline. Confirming Agreed Balances 4.6. Prior to the AoB exercise, a de minimis level is set for responding to statements. The level is set to ensure that a significant amount of intra-group balances are agreed between organisations, while also removing the requirement to chase other bodies for small payments.

The exclusion of smaller amounts from the AoB exercises does not mean that these amounts should not be paid within the course of an organisations regular business. 4.7. For the 2017-18 financial year, the de minimis level for I&E is set at £100k at Q3. The de minimis level for Rec & Pay agreement is also set at £100k for all exercises. This means that where the net total of all invoices notified by the receivables body (inclusive of credit notes) is above this level, confirmation of the balance agreed to should be issued to the receivables organisation. At

15 Q4, the de minimis level for I & E is set at £2m, to avoid unnecessarily increasing the burden on organisations. Details can be found in the table in section 4.15 of this guidance. 4.8. Although there is no requirement to issue a return on balances below these de minimis levels, they still need to be included within the total balances recorded on the collection forms against the relevant receivable body – see section 5. It would be considered good practice to issue a return to receivables bodies where a formal dispute is likely to be (or has already been) raised on some or all of the balance.

Examples may include where you do not agree to the total invoiced or you are aware that invoices for another organisation have been issued to you (see worked examples at Annex 3).

4.9. On responding to the receivable organisation, the payable organisation should, wherever possible, complete the statement template that has been issued to them. If no pro forma has been provided for completion, then the payable organisation should include the following in their response:  The invoice number and outstanding balance as indicated by the receivable organisation on their statement.  The amount of the invoice which is agreed to (or agreed to in principle) – i.e. the amount which the payable organisation has approval to pay.  The amount of the invoice which is not agreed to, but not yet in formal dispute  The amount of the invoice which is to be taken to a formal dispute – i.e.

the amount which the payable organisation will not approve for payment, and for which the dispute will be formally raised for mediation.

Where balances are not agreed in full, a description of the requests for additional information is included. 4.10. When communicating approval it is important to distinguish the balance on an invoice that has been approved and agreed to, from the balance which has not. For example, if an invoice is for £30k for a secondment of 30 days’ work (at £1k per day) but the person only did 20 days, the expectation would be that the payables organisation agree to the 20 days worked, but not agree to the other 10 days. On responding, it would be expected that the payable organisation would therefore agree to £20k, but not agree (either through formal dispute or otherwise) the remaining £10k.

Discussion would then occur between the payable and receivable organisation. In this instance, the receivable organisation would need to adjust their income and receivable amounts in their accounts because they have over-invoiced. Both organisations would record a negative adjustment in the “adjustments” column or a revised statement can be issued with prior agreement from both parties and the new amount will be recorded in the Notified column. 4.11. In the example given in 4.10, it would not be appropriate for the payable organisation to disagree or dispute the entire invoice balance. Details on how this would be recorded on collection can be found in section 5, and there are further examples given in Annex 3.

16 Timing of Responses 4.12. The deadline for responding to statements issued is agreed between the Department of Health & Social Care and its national bodies, in advance of the exercise. Payables organisations should ensure that a response should be issued to all statements with a balance greater than the de minimis level before the deadline passes. 4.13. Additionally, wherever possible, the payable organisation should attempt to issue a response to the receivables organisation as soon as possible in advance of this deadline if they are aware that they will not be agreeing to the statement balance in full.

This is to let the receivables organisation know about any problems they may not be aware of, and ensure that if information is requested from them they have time to act in advance of the deadline as the receipt of additional information may allow balances to be fully agreed. This will also allow time for the receivable organisation to reallocate balances to the correct organisation if they were allocated incorrectly initially. Agreeing to Accruals 4.14. During the exercises at Q2 and Q3 there is no requirement for the receivables organisations to issue accruals statements; however an additional column has been inserted into the Q3 data collection forms to separately identify accruals.

Accruals must be recorded within the collection forms for all exercises to ensure that the ‘total’ figure reflects the true ledger position. At Q4 an accruals statement must be issued and discussions between the two parties must take place, as per the Q4 timetable. Many accruals originate with the payables organisation, such as where goods or services have been supplied, but no invoice has been issued for the goods yet.

4.15. Variances may arise where no such discussion has taken place. These variances can be overcome through discussion between agreement bodies outside of, or in advance of, the agreement exercise to ensure both bodies can agree on the amounts that are due. It is important as part of ongoing business, that payables organisations seek to obtain invoices for goods received where they have not been sent in reasonable time. It is also important that payables enter into discussions regarding estimates.

17 Summary of thresholds for issuing and agreeing to statements Area Policy - Issuing Statements Policy – Agreeing Statements Q2 R&P £2,500* £100,000** Q3 R&P £2,500* £100,000 Q3 I&E £10,000* £100,000 Q3 accruals No statements* No statements Q4 R&P £2,500 * £100,000 Q4 I&E Statements to be issued over £2m.* Statements and agreements over £2m Q4 accruals No de minimis* Statement issued but agreement not mandatory * Note that organisations are still able to send statements at a lower level than these if they have automated processes for issuing statements and wish to continue doing so.

Suggested threshold for voluntary agreements

18 5 Completing the forms 5.1. In Q3 and Q4, following on from the agreements process, both payables and receivables organisations are required to report their receivable/payable and income/expenditure balances to the Department (or its National bodies), through Provider Finance Return (PFR) forms, NHS England data collection form (NHS England group bodies) or Consolidation Schedules (ALB/NDPBs). The term “data collection form” will be used in this guidance to refer to all the above forms, and any other form used for submitting balances under the AoB exercise.

Overview of data collection 5.2. Each of the payables, receivables, income and expenditure are split into a further four parts:  Notified  Accrued  Adjusted  Disputed (Payables/expenditure only)  Total – this is the amount which is validated against the value of payables and receivables or I & E included in the accounts notes. It is a protected cell containing a sum: Notified + Disputed + Adjustments + Accrued = Total. Organisations are not expected to calculate their own totals. 5.3. For income and expenditure only, the above columns are split between admin and programme. More detail on this split is provided in section 6 of this document.

(Note: NHS Trusts and Foundation Trusts income and expenditure is all programme, so this split is not relevant).

5.4. Some data collection forms contain a tab separate to the balance agreements where a justification of the figures can be included. Where any adjustments or disputed balances are included, the gross balance across each organisation type is included within the freetext tab on DH forms. 5.5. The following subsections show what type of balance should be recorded in each column, and Annex 3 provides examples of how this may work in practice. Notified Balance 5.6. In all circumstances, the invoiced balance included on the statement issued by the receivables organisation should be recorded under “notified” if the statement has been addressed to the correct organisation.

This balance should be reflected within the payables organisation “notified” total. This is to show that both parties have the same starting position, and therefore where the overall total does not match between two organisations, this is due to true

19 disagreements on the balance recorded elsewhere. This balance should be static, and should not change throughout the exercise. 5.7. The exception to the above is accruals – which should be separately identified on statements. This figure should reflect accruals ledger balances at each quarter exercise, although due to ledgers closing at Q3, it is likely that any changes agreed between parties in the accruals column, will reflect a divergence from the ledger balance. At Q4 an accruals statement is issued, and discussions should take place to ensure the accruals figure is consistent between counterparties and agreed wherever possible.

However, despite the value of the accrual statement, organisations should always ensure their accruals ledger balance is shown in the accruals column – statements are sent at Q4 to inform the discussion.

Accruals 5.8. Accruals are recorded separately in the data collection form. Organisations should report accruals in this column, in order to separately identify accrued balances. For Q3, accruals must be recorded in the accruals column based on the information held in ledgers. At Q4, a separate accruals statement is issued and discussions should take place between organisations to ensure accruals amounts are consistent between counterparties and agreement should take place wherever possible, although the figure recorded should still represent the ledger balance. Although accruals statements are not issued at Q3 it is vital that organisations report the figures and mismatches arising from any issues with accruals still form part of the mismatch resolution stage.

5.9. Where a balance cannot be agreed prior to the agreement deadline due to un-validated invoices, an adjustment should be made to the notified balance (via the adjusted column), and where invoices received prior to the deadline stated in the timetable have not been validated, every effort should be made to accrue for the transaction / balance to avoid mismatches. It is not acceptable for mismatches to arise purely because the payable organisation has not yet validated an invoice sent before the deadline specified in the AoB timetables.

Adjustments 5.10. An adjustment may be recorded in a number of circumstances. In the majority of cases this will be used to show an amendment to the ”notified” balance, where the invoices have not been received or where part or all of the invoice cannot be agreed, but has not been formally disputed. It may be used by the receivable organisation to show adjustments to their own balances where too much or too little was initially notified. 5.11. Receivables Adjustments: A positive or negative adjustment could be made where there is a change in the receivables balance since the statement was issued.

This could be

20 due to individual amounts listed on the statement being lower than the outstanding amount or a missing receivable being identified as a result of discussions with a counterparty. 5.12. Payables Organisations: A positive or negative adjustment may be recorded where the receivable organisation gives late notification of an invoice, or notifies that the balance previously included on the statement was too low, or where a future period invoice is included on a statement. These adjustments may subsequently cancel out if they cannot be approved. A positive or negative adjustment may also occur due to invoices appearing on your own reports that were not included within the statement you have received but which you still have as outstanding.

In the case of missing invoices, where the payable organisation is aware of the invoice, every effort to obtain the invoice from the receivable organisation should be made.

5.11. Annex 3 contains more detailed examples of where an adjustment balance may be recorded. Capital Adjustments 5.12. Capital income and expenditure should be included in the issued statements, and should be clearly marked as such. The total notified amount on the statement should be included within the ‘notified’ column. The organisation(s) treating the income/expenditure as capital, should then enter the balance as a negative amount under the ‘adjustments’ column to remove the capital element from the overall trading totals being agreed. This may result in an unavoidable mismatch between the organisations.

5.13. For example, the receivable organisation may have supplied a member of staff to the payable organisation. However, the staff member may have been working on the development of software at the payable organisation, and therefore the payable organisation will not be recording the cost of the staff member as expenditure but rather it would capitalise the cost. As a result, on analysis of their expenditure, the payable organisation would not have the staff cost to match against the receivable organisation’s staff income. In this instance, the payable organisation should adjust out any intercompany transactions relating to capital expenditure in the ‘adjustments’ column.

Disputes 5.14. Balances recorded within the ‘disputed’ column must represent a reduction in the balance (i.e. a negative value) entered by the payable organisation to reflect a formal disagreement. A disputed item should never be positive, as logic dictates that organisations would never dispute that they owed a greater amount. A dispute would occur in a situation where the payables organisation has completed its investigation into the balance, and has determined there is no agreement to pay. This may be due to a contractual disagreement over the amount which should be paid. There must be intention by the payables organisation to take the invoice to mediation or undertake the formal dispute process set out in the contract.

Any disputed invoices should be notified in writing to the counterparty organisation.

21 5.15. Receivable Organisations: A disputed balance should not be recorded on the data collection form under any circumstances. As it would not make sense for a receivable organisation to formally dispute their own invoices, the data collection forms do not allow a dispute to be entered. The expectation is that the receivable body will enter all transactions it expects to receive payment for in the “notified” column; it is the responsibility of the payable organisation to dispute that balance. 5.16. Payable Organisations: When recording the dispute, only record the element of a transaction which is actually being disputed e.g.

if an invoice for £70k only has a dispute of £5k then only the £5k should be recorded. The full £70k would still be recorded under “notified” as it was included on the statement by the receivable organisation. However, the “Total” balance would be reduced by the entering of a negative £5k in the “disputes” column, to show only £65k, which reflects the actual balance that the payable organisation is recording in their accounts. The receivable body records £70k in their return, with the dispute leading to a £5k mismatch between bodies. 5.17. A disputed balance would constitute a valid reason for a variance to exist on agreement of the balances.

Payables organisations with disputed balances must ensure that the balance has been disputed for a valid reason, and not just to avoid clearance of variances, and that the relevant national body has been informed in an effort to resolve the dispute.

5.18. Annex 3 contains examples of where a disputed balance may be recorded.

22 6 Areas of potential Issues Gross and Net Accounting & Recharges THE DEFAULT TREATMENT IS FOR ALL TRANSACTIONS AND BALANCES TO BE TREATED GROSS 6.1. The overarching principle is that transactions must be accounted for in accordance with accounting standards, with all treatments having been agreed by both parties. IAS 1 states that “income and expenses, may not be offset unless required or permitted by an IFRS. Generally, this means revenue income and expenditure must be recorded gross unless the transaction is of a non-trading nature and an organisation is deemed to have transferred risks and rewards and be acting solely as an agent.

Gross accounting" refers to the separate recording of inflows and outflows in an entity's accounts, recognising the impact on the entity's income and expenditure. "Net accounting" refers to the netting off of inflows and outflows in an agency relationship, so that the entity only recognises impacts to the extent that it is acting as a principal. 6.2. The accounting treatment of transactions should be agreed in advance between all parties (including the care provider) to ensure consistency. If transactions are to be recorded on a net basis, or as a recharge, organisations must seek to ensure that:  The accounting treatment of transactions is agreed between all parties to ensure consistency; and  Agreements reached should be clear and auditable The general principles are:  Transactions that are of a trading nature are to be shown gross by both parties;  Where an organisation acts solely as an agent from the transaction, the item should be treated as a recharge and be accounted for net;  Receivables and payables should be recorded against the organisations actually paying the invoices, even in an agency situation; and  Each circumstance should be assessed individually and treatment agreed 6.3.

An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. For example, with a staff recharge relevant considerations might include who bears the risk if the member of staff is off sick for a period and unable to work, among other factors. If the receiving organisation would continue to pay the employing organisation in the event of a period of sick leave, this might be a factor suggesting that the employing organisation has transferred the risks. As noted in paragraph 6.2 each circumstance should be assessed individually.

Organisations should discuss with their external auditor if they need to determine how to account for an arrangement.

6.4. In an agency relationship, the cash may pass from the principal to the agent in advance of the delivery of any actual service. At this point, for the purpose of AoB, the agent recognises a payable and the principal recognises a receivable. However, once the third party has begun delivery of the service, they have earned some income and this is then reflected in the receivables and payables.

23 6.5. In order to illustrate this, two examples are shown below relating to FT’s. NHS England Commissioning entities operating in the ISFE environment should refer to separate guidance issued by NHS England contained in Appendix 4.

24 Reflecting gross and net accounting in the collection forms: staff recharges Foundation Trust A is completing its collection forms. There are four scenarios for how it might have staff recharges with NHS Trust B. 1) Staff permanently employed on Foundation Trust A payroll. Foundation Trust A is recharging NHS Trust B. (1a) GROSS FOR THE EMPLOYER (i.e. risks and rewards remain with Foundation Trust A – FT A is the Principal) (1b) NET FOR THE EMPLOYER (i.e. risks and rewards passed to NHS Trust B – Foundation Trust A therefore the agent) Foundation Trust A: Income Record in income note with WGA code Nothing recorded in income note – items are netted off.

Foundation Trust A: Expenditure Record total staff costs as permanently employed against salaries and wages. Record as 'business external to government'1 with no WGA codes attached to transaction. Record total staff costs as permanently employed. Record in 'business external to government with no WGA codes attached to transaction. Record income received from WGA body in respect of recharge in 'Recoveries from bodies in respect of staff costs netted off expenditure' in the employee benefits note. This would show as a negative amount to represent receipt. It would be classified as 'external to government' Overall staff costs would show nil assuming the recharge amount was for full staff cost amount.

Impact Show gross income and gross staff costs Show no income and staff costs netted to £0 Equivalent for NHS Trust B NHS Trust B will record the expenditure in staff costs as ‘other’ (rather than permanently employed) and in the WGA analysis for Foundation Trusts. NHS Trust B will record the expenditure in staff costs as ‘other’ (rather than permanently employed) but will record this as ‘external to government– they are the organisation recording the principal element of the employment cost.

Transaction elimination for DH consolidation Upon consolidation income for FT A will be eliminated with expenditure from NHS Trust B (both being WGA).

FT A staff costs will remain. Upon consolidation staff costs from NHS Trust B will remain. Foundation Trust A accounts will be already showing nil income and nil staff costs (income netted off staff costs). I

25 2) Staff permanently employed by NHS Trust B. Foundation Trust A is being recharged by NHS Trust B. Type (2a) GROSS FOR THE EMPLOYER (i.e. risks and rewards remain with NHS Trust B – NHS Trust B is the Principal) (2b) NET FOR THE EMPLOYER (i.e. risks and rewards passed to Foundation Trust A – the employer NHS Trust B is the agent and does net accounting) Foundation Trust A: Income n/a n/a Foundation Trust A: Expenditure Record staff costs as 'Other' against Salaries and Wages. As the transaction is with another WGA body, then transaction should have coding as ‘business with NHS Trust’ and should be shown in that column.

Record staff costs as 'Other' against Salaries and Wages. If net then all transactions would be classified as 'external to government' Impact NHS Foundation Trust A shows staff costs paid in respect of the individual, recorded as a WGA transaction. NHS Foundation Trust A shows staff costs paid in respect of the individual, recorded as an external transaction. Equivalent for NHS Trust B NHS Trust B will follow the same approach as Foundation Trust A did in scenario (1a) above: Record income in income note (in WGA column for ‘business with foundation trusts’) Record total staff costs as permanently employed against salaries and wages as ‘external to government’ NHS Trust B will follow the same approach as Foundation Trust A did in scenario (1b) above: Record total staff costs as permanently employed.

Record in 'business external to government'. with no WGA codes attached to transaction. Record income received from WGA body in respect of recharge in the employee benefits note. This uses the ‘recoveries netted off expenditure’ row in the employee benefits note. It would be classified as 'external to government.

Overall staff costs would show nil assuming the recharge amount was for full staff cost amount. Transaction elimination for DH consolidation Upon consolidation the income recorded by NHS Trust B will be eliminated against the expenditure recorded by Foundation Trust A. The NHS Trust B external staff costs will remain. Upon consolidation, staff costs from NHS Foundation Trust A will remain. NHS Trust B accounts will be already showing nil income and nil staff costs.

26 I&E - Admin and Programme Split 6.6. The Department of Health & Social Care Consolidated Supply Estimate, which is voted on by Parliament, splits out Admin and Programme expenditure.

The Department is managed against these admin and programme control totals and the breaching of either could result in an Excess Vote accounts qualification and a Public Accounts Committee Hearing. It is important that the amounts recorded as Admin or Programme within the Department of Health & Social Care Consolidated accounts and the AoB exercise are accurate, to avoid under or over eliminating programme or admin expenditure/income as this would affect the performance against the Estimate. Therefore, when agreeing balances, agreement bodies are expected to not just agree the balance, but also agree the type.

Whether balances are Admin or Programme will depend on the activity to which the balance relates and the type of organisation the transactions are with. 6.7. It is expected that Department of Health & Social Care, CCGs, CSUs, NHS England Local Offices, Regional Teams and some ALBs will have a split of admin and programme I&E. NHS Foundation Trusts and NHS Trusts will only have programme I&E. There are a number of ALB’s which have admin only; these are NHS Business Services Authority, Health Research Authority, Human Fertilisation & Embryology Authority, Human Tissue Authority and Professional Standards Authority.

6.8. In determining whether a transaction is admin or programme, organisations are asked to refer to the DH Group Accounting Manual and the Financial Reporting Manual. Generally, admin balances are incurred in running the organisation, with programme incorporating all other balances. There will be occasions when it is not possible to resolve mismatches on admin and programme, however each circumstance should be assessed individually and treatment agreed should be clear and auditable. I&E - Admin and Programme Split – NHS Property Services In 2016-17, in response to feedback from NHS Property Services and organisations across the Departmental Group with whom they do business, the Department revisited the methodology by which NHS Property Services record and agree the categorisation of their intercompany income and expenditure as admin and programme.

The revised methodology remains unchanged for 2017-18. 6.9. Due to the nature of their business, NHS Property Services have, to date, applied a centrally calculated percentage to their income and expenditure to calculate the proportion of admin and programme. Whilst this ensures an accurate admin and programme split of accounts data for budgeting purposes, it has caused significant problems in terms of the agreement of balances exercises and the Department believes applying the counterparty view to agreement of balances transactions is a more accurate method.

6.10. In response, NHS Property Services will no longer apply a generic split of admin and programme to their intercompany income and expenditure. Income statements sent by NHS Property Services will include total invoiced income but no split of admin and programme. Other bodies whose expenditure (and income) is with NHS Property Services should continue to derive, record and report their view of the correct admin/programme split in their accounts and agreement of balances data (including

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